Free Money Finance

Free Money Finance March Money Madness, Round 1, Posts 9-12

2012-02-10T13:15:00-05:00

Here we go with the first round of Free Money Finance March Money Madness (to follow all the action click on my March Money Madness category link and scroll down to read all the posts involved in this subject.)

I've listed each "game" (one post versus another) in segments along with the wording provided by the author when the post was submitted. I've also listed a keyword after each post title to make it easy to vote (as a made-up example, you can just comment: Game 1: Saving; Game 2: Investing, etc.) Be sure to comment which one you like the best out of each set of two -- you will help determine the winner! Criteria for the best article is somewhat subjective, but you can use these factors as a guide: 1) practicality of the post 2) how interesting/provocative/unique it is, 3) the "personal-ness" of it and 4) its impact on net worth.

Here are today's games:

GAME 5

Gigs For Goals (Gigs) - Remember as a kid when your mother told you that if you wanted something, to go out and get a job? What if you did that for all your "wants" now as an adult?

VERSUS

Top 10 Money Saving Holiday Travel Tips (Travel) - The holidays, November-January, are the most frequently traveled months of the year. This post gave readers practical and actionable insight on how to save money during this high-peak time of the year, when funds are often budgeted.

GAME 6

Reality vs. Good Intentions (Intentions) - It pays to examine what you’re really doing vs. what you intend to do or what you believe will happen. After all, what's more likely: That life will go perfectly, or that you'll experience some speed bumps along the way?

VERSUS

How I Saved Over $300 On My Cable And Internet Bills (Bills) - Two telephone calls, $300 in savings on cable and internet services. See how it's done by reading this post.

Help a Reader: Triplets

2012-02-10T04:29:00-05:00

Here's an email I recently received from a reader:

We just found out we may have triplets (and are sorta freaking out financially).

I will start with, I make an OK wage in Ohio (low cost city). I have very little debt (no CC debt, no car payments) in the form of a mortgage, we have only been in the house since 2008. The house is 2100 SQFT with 3 bedrooms. My wife takes care of our 2 year old son, and does not work. We both drive 4 door sedans. With one child we are very comfortable and able to meet most of our financial targets, max out 401K, contribute to 529 plan, solid savings plan and do not have to live like paupers to do so.

Two major factors we are weighing considering we just received this news:

1. House is too small for four kids, only having 3 bedrooms. Proposed solution – plan to move in next 3 years.

Does anyone have suggestions what to expect, considering we have been in the house such a short time?

The next house may have to be considerably larger to accommodate this type of expansion.

2. Cars can’t accommodate enough car seats. Proposed solution – plan to buy new mini van – Most of the used mini vans we have seen don’t have the safety features we need (latch on all seats). Also, it seems that the value of used mini vans (of the type we want/need) do not lose a lot of value so the cost difference new vs. used is minimal.

Options for buying new mini van – Trade in both cars to get close to paying off the van – get a new smaller car for me. This may also give us more leverage with the dealer to deal with us considering we are going to buy two cars. This option has the highest monthly out of pocket expense.

Trade in older car that has less value, keep newer car which will lead to a larger loan for the mini van. Middle monthly out of pocket expense.

Trade in newer car that has more value, keep older car. This reduces the loan for the mini van. Lowest monthly out of pocket expense.

3. We have decided, for now, to reduce our 401K participation down to the minimum to receive company match (Company match is not guaranteed) to help with expenses and with new mini van purchase, as well as potential house moving expenses. This would only be until we have identified the cost, and how much we may be able to put into an IRA each year or increase our 401K back to maximum. Opinions?

What's your advice for him?

Americans Woefully Unprepared for Retirement

2012-02-09T15:45:00-05:00

US News offers some thoughts on preparing for retirement. But it's not the advice I want to focus on. Instead I want to comment on these facts from a Charles Schwab retirement income survey:

According to the study, 64 percent of respondents indicated they had less than one year of cash living expenses saved for retirement, and one-third of respondents said they had not even determined what their essential living expenses in retirement would be.

This study wouldn’t be so overly alarming except for the fact that the respondents were just five years away from retirement. Those five years still provide some time for creating a strategy to have the retirement you want, but starting earlier allows you to plan for those extras.

Uh, I have some news for those people -- they are NOT retiring in five years!

What is US News thinking? Can you really start with nothing (or almost nothing) and make enough changes in five years to retire? If so, I'd LOVE to see that plan.

I've been working on retirement for 20 years now, and I'm still not where I want to be.

I used to be surprised when I saw numbers like this. But after blogging for as long as I have, I am no longer shocked at the lack of financial knowledge, preparedness, and discipline of the average American. The only thing that does cause me some fret is thinking about what's going to happen when all these people get ready to retire, and they can't -- and yet they can't work (either physically or can't find a job.) Seems to me that's going to be a big mess for us all.

Compute Your Net Worth Once a Year

2012-02-09T10:45:00-05:00

The following is a guest post from Marotta Wealth Management. I actually compute my net worth once a month. I'll be discussing my year-end 2011 net worth soon on an upcoming post.

Since the end of last year, the U.S. markets went up and then down and then back up to end the year sideways. Market volatility was especially pronounced in the European Union as sovereign debt and the struggle to enact austerity measures whipsawed the markets, although not as a result of any changes in the underlying fundamentals.

If you are within 20 years of retirement (age 45 to 65), it's critical to get your retirement planning updated. Computing your net worth annually is like taking a sextant reading to chart your course toward financial security. The changes of the past year provide another incentive to take stock of where you are in relation to your goals and readjust your asset allocation and savings rate.

Net worth gives you a snapshot of how much money would be left if you converted everything you owned into cash and paid off all your debts. Compute your net worth by creating four lists.

Liquid assets: An asset is something you own that has significant value. A liquid asset can be sold in a matter of days. Include personal bank accounts (checking, savings and money market), certificates of deposit, bonds, mutual funds, stocks and exchange-traded funds. Use values as of December 31 of the previous year so all of your amounts are calculated on the same day.

Nonliquid assets: Nonliquid assets are those things you own that incur a penalty when they are sold. Include the value of your retirement accounts (IRAs, 401ks, 403bs, SEPs, profit-sharing plans and pension plans). Add real estate investments as well as the market value of your home. Use the assessed value.

Other nonliquid assets may include proprietorships, partnerships or company stock in a firm that is not publicly traded. Add the cash value of any life (nonterm) insurance. Some people include jewelry, collectibles, cars and boats in this category. Although these items often have a high retail value, their true worth is often a small fraction of their initial cost. I do not recommend including personal property.

Immediate liabilities: List what you owe to creditors. Immediate liabilities include credit card debt, car loans, student loans, other loans and any bill or debt that must be paid within two years.

Long-term debt: For most people, long-term debt is primarily their home mortgage, but it may encompass other real estate or business loans.

The first time you gather all of this information will be challenging, but it gets much easier each subsequent year. By keeping an annual record of your net worth, you're creating a valuable financial planning tool.

Next compute three additional values. For your total assets, add your liquid and nonliquid categories; for your total liabilities, add your immediate liabilities and long-term debt; and finally, for your net worth, simply subtract your total liabilities from your total assets.

Use these net worth numbers to compute other values useful for reaching your financial goals. For example, your emergency reserve (liquid assets minus immediate liabilities) should be at least half your annual income. Any extra can be invested more aggressively for appreciation. Your debt load ratio (total liabilities divided by total assets) should be under 35%, with your home mortgage comprising most of your debt.

If you are trying hard to pay off your mortgage ahead of schedule instead of making a huge effort to save and invest, your attempts are laudable but mistaken. The quickest path to wealth includes holding a home mortgage you could pay off but you choose not to in order to take advantage of the tax benefits. The rich leverage wisely and invest.

A net worth statement helps you measure your progress toward retirement. At age 65 you can only withdraw 4.36% of your portfolio to maintain your lifestyle. In other words, to keep the same standard of living, you will need about 23 times what you spend annually.

Take your net worth and divide it by your annual take-home pay. The result shows you how many times your annual standard of living you have amassed in savings. If you are younger than 40, the number probably comes to less than five, which is adequate for now.

By age 45, you should be worth about seven times your annual spending. More sophisticated retirement planning includes the difference between taxable, tax-deferred and Roth accounts as well as Social Security guesses and defined benefit plans, but the method described here will approximate your progress. This list shows by what age you should have saved different multiples of your annual spending.

    Age: 26; Annual Spending Saved: 1
    Age: 31; Annual Spending Saved: 2
    Age: 34; Annual Spending Saved: 3
    Age: 38; Annual Spending Saved: 4
    Age: 41; Annual Spending Saved: 5
    Age: 43; Annual Spending Saved: 6
    Age: 45; Annual Spending Saved: 7
    Age: 47; Annual Spending Saved: 8
    Age: 49; Annual Spending Saved: 9
    Age: 51; Annual Spending Saved: 10
    Age: 53; Annual Spending Saved: 11
    Age: 54; Annual Spending Saved: 12
    Age: 55; Annual Spending Saved: 13
    Age: 57; Annual Spending Saved: 14
    Age: 58; Annual Spending Saved: 15
    Age: 59; Annual Spending Saved: 16
    Age: 60; Annual Spending Saved: 17
    Age: 61; Annual Spending Saved: 18
    Age: 62; Annual Spending Saved: 19
    Age: 63; Annual Spending Saved: 20

If your net worth is higher, congratulations! You may be able to retire earlier than 65. For every 1 unit you are over, you could consider retiring about a year earlier. Conversely, for every 1 unit you are under your age's benchmark, you may have to work an additional year beyond 65.

Between ages 40 and 50, your net worth should increase by 1 unit of your annual spending every two years. That means your current net worth divided by your take-home pay should be 1 unit greater than it was two years ago. And if you are between age 50 and 65, your net worth should have increased this year by 1 times your take-home pay.

Want to retire younger? Try lowering your standard of living. Most retirees spend about 70% of the gross salary they earned while working. If you can live off 50% of your take-home pay, it's not as essential to save as much.

Need to catch up? Save more than 15% of your take-home-pay. Determine how far you are behind and what additional percentage you can save each year. For example, at age 30, you should be worth 1.5 times your annual income. If your numbers don't match that ideal, an additional 0.3 times your annual income will help you get there. You could save an additional 10% of your income (for a total of 25%) for three years. If that's too much, try saving 20% (an additional 5%) for six years.

Money makes money. By the time you reach your 40s, you should have enough investments to be earning about half of your annual spending each year. Early in life what you save is most important for building wealth, but as you approach age 40 what you earn on your investments becomes critical. While you are young, the best advice a professional can offer is to "save." As you amass significant wealth, it is more pressing to "manage" well what you already have.

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Some thoughts from me:

1. I will be updating my retirement plan soon and will report my progress to you all.

2. I like the fact that he emphasizes saving based on retirement SPENDING and not on current INCOME (which in many cases are not closely related).

3. My net worth is at 24 times my annual spending, so I guess I'm ready to retire. ;-)

4. Key point: "Want to retire younger? Try lowering your standard of living. Most retirees spend about 70% of the gross salary they earned while working. If you can live off 50% of your take-home pay, it's not as essential to save as much." Exactly!!!!!!

5. "Money makes money." Usually this is true. This year, the way the market was up and down, not so much.

Comments on This Blog

2012-02-09T08:04:35-05:00

I have received several emails lately from FMF readers who have tried to leave comments. In many cases, they seemingly posted the comments only to have them disappear. I have been working with Typepad (my blog software and host) to try and determine what the problem is, but they can't seem to crack it.The situation is made worse by the fact that there seems to be no pattern to the problem. It's not like all comments are blocked as I have had hundreds of comments left over the past week. Just some seem to get caught and lost somehow.

If you've had this problem, please send me an email with a DETAILED (the more detail the better -- which post, how long was it, what browser were you using, and so on) explanation of what happened. This information will be vital to helping them sort out the issue.

As most of you know, I do not delete comments as a matter of policy. Spam comments do get deleted as do some that are offensive (name calling, bad language, etc.) or useless (like "great post.") But I usually error on the side of keeping as many comments up as possible. Even those that seem like they are left to help with keyword Google "juice" are often left up if they are valid (though I do change the keyword.) Bottom line: if you've left a valid comment here and it's not showing up, it's not because I've deleted it. It's because the system has somehow eaten it. Hopefully, we can get this resolved quickly.

Thanks for your help and understanding.

How Much Do You Spend on Kids' Birthday Parties?

2012-02-09T04:29:00-05:00

US News gives some alternatives to pricey kids' birthday parties. This piece made me wonder -- just how much do people spend on birthday parties for their kids? We have some friends that go totally overboard and others that seem to pass them by without much fanfare. Here's what we do:

Each of our kids gets $100 for his/her birthday.

They decide what they want to do with the $100 -- have a party, get presents, or pocket the cash.

Over the years, we've had all of the scenarios accepted.

The current favorite appears to be "pocket the cash."

No matter which option is selected, we make the birthday a celebration by always having cake and ice cream as a family, letting the child pick a favorite meal that my wife makes, letting each child pick a place we all go out to eat in celebration, and doing something special as a family such as staying up late to watch movies that the birthday boy/girl has selected. (FYI, the costs for these does not come out of the $100.)

So, that's what we do and how much we spend. What about you?

Tricky Tactics by Mutual Funds

2012-02-08T15:45:00-05:00

We've talked a lot about index fund investing and, specifically, how they beat most actively managed funds over a long period of time once costs are deducted from returns. As well as they do, Wise Bread thinks index funds probably beat more actively managed funds than is generally accepted because of some tricky tactics by those other funds. Their summary:

Most funds try to compare themselves to the S&P 500, but many of them cite the performance of the index itself instead of the performance of the index plus the dividend that the 500 companies in the S&P 500 distribute. The current yield on the S&P 500 is around 2%, which means that your fund (or your own stocks) better be outperforming it by more than 2% for it to be worth your while.

Here's my take on this:

Some mutual funds probably do try to compare themselves to index funds without dividends to give themselves an unfair advantage.

I would guess (assume) that most reputable rating sites would take total return into account (which would include dividends) when they do their comparisons.

I'm not so sure that many mainstream media journalists would be smart enough to add in dividends.

Even if this issue is widespread (which I'm not sure it is), index funds STILL beat the vast majority of actively managed funds over time once all costs are deducted from gross returns.

Anyone have an informed opinion on how commonplace the "not including dividends" comparison is?

Free Money Finance March Money Madness, Round 1, Posts 5-8

2012-02-08T13:15:00-05:00

How Much Do The Top Income Earners Make? (Top) - It's important to understand where your income level stands among your peers since wealth and income are relative. You may think you're poor, but all it takes is making $33,000+ to be in the top 50% of income earners. In this post, you'll learn about the inequity in America and how we can all pitch in to help make our country great. You'll also learn how to save millions over time, no matter what your income level is through a realistic savings guide. Join the 880+ comment discussion!

VERSUS

24 Quick Actions You Can Do Today That Can Change Your Financial Life Forever (Change) - This post gives step-by-step instructions on completing 24 specific actions (and the estimated time they'll take). Each of this action has the potential to radically change your financial life. We've provided 24 of them... can't you at least do ONE today?

GAME 4

What To Do If You've Been Passed Over For Promotion And Didn't Get A Raise (Passed) - It's a dog eat dog world out there and sooner or later, you will face disappointment in the work environment. You might want to throw coffee in your manager's face and send out a "screw you all" blast e-mail, but don't. As a manager for the past 10 years, I provide some recommendations of what you should do if you've been passed over and short-changed. You are your greatest asset for building wealth. Don't let a road bump derail your path to financial fortitude!

VERSUS

Seven Businesses You Can Start for $100 or Less (Businesses) - One of the obstacles to starting a small business is the misguided notion that you need a lot of money to do so. But there are plenty of businesses you can start for little to no money — in some cases just for the cost of getting a business license. Here are seven businesses you can start for $100 or less.

Worst Money Advice Ever

2012-02-08T10:45:00-05:00

MSN Money lists six stories of people telling the worst financial advice they ever received. Here are the stories with my thoughts on each:

"About 10 years ago an old accountant advised we cash in a substantial 401k plan to pay off credit card debt, instead of instituting a plan to pay it off over time and learn how to spend and save at the same time."

I've learned this the hard way over the years of advising people: if the underlying habits don't change, then normally good money moves are worthless (not that cashing in a 401k is a good money move.) But hitting on their latter point, the focus needed to be on getting their spending under control and paying off the debt. If that didn't happen, no amount of money management would.

"To buy an extra house, get a tenant and let the tenant's rent pay the mortgage and all the bills. So many people and books say this, but many tenants are horrible. I've had great (renters), nightmare (renters) and everything in between."

This can be very good or very bad advice. I know some FMF readers do quite well buying and renting real estate. But these people are smart about it, buy right, and manage their affairs based on sound business practices. They don't simply buy a place at any price, put up a "for rent" sign, and that's it. It takes work and effort to do well in this sort of venture.

"Someone told me not to invest in my own small business. My partner and I decided to ignore this advice and invested in our start-up, MyFreebeez.com, anyway. It has turned into a huge success, and we are absolutely glad we did it. We've already earned our investment back many times over and are still continuing to earn on that investment."

The result could have easily been "we lost everything", but I know what he's saying. If you have a good idea and believe in it, then why not invest in it? If it does well then it's likely to be the best investment you'll ever make.

"During college, I was told to open a credit card and use it to charge all my books and school fees on. The 19% or more interest on a credit card is far more than the subsidized government loan that ended up covering my school costs."

Uh, yeah. Whoever told you that you should open up a credit card, charge money you didn't have, and let interest build at 19% is not the type of person who should be giving out financial advice.

"Around 1998, before the tech crash, my husband's grandfather passed away. He left $5,000 for each of his grandchildren and great-grandchildren. My husband's mother and father advised us to invest in mutual funds for ourselves and our children, (saying) the fund would grow exponentially and by having (the money) in a fund, it would be diversified. It never grew much at all; in fact, it lost money. I kept it in there with the philosophy of 'leave it and forget it' -- don't watch what it is doing because it will go up and down."

I feel their pain. I saw my investments go up and down with the market during that time as well. It was rough. Then again, investing involves risk. Putting money away for a long time actually is a fairly good idea. Perhaps they simply put it in the wrong fund?

"To not pay off your student loans until you're done with college. If I had started making payments in college like I had planned to do, it could have saved me thousands."

If you're able to make payments in college, why are you borrowing money? Does he mean paying on loans he once needed but didn't later on in college?

I'm not sure what the worst financial advice I ever received was. I don't think I ever got much because no one around me knew anything about managing money (and hence the problem -- we were all learning as we go.) But I know the best advice I ever received -- it was from the book The Millionaire Next Door.

What's the worst financial advice you ever received?

Where Do You Stand on These Financial Ratios?

2012-02-08T04:29:00-05:00

Dough Roller lists a set of financial ratios and gives guidelines on where each of us should stand in relation to them. These can be used as a sort of financial check-up to see if you're on track. Here they are along with where I fit into each one (FYI, I cut out the five (yes, FIVE!) debt ratios since I have no debt, including a mortgage, hence they are all "0" for me -- which made for some boring reading for you all if I included them):

Emergency Fund Ratio (Liquid Assets/Monthly Expenses) -- The generally accepted rule of thumb is that you need 3 to 6 months of expenses in an emergency fund.

I currently have about four months' salary saved or ten months of expenses in very liquid assets. Yes, this is another benefit of living on far less than you make. ;-)

Doomsday Fund Ratio (Financial Assets/Monthly Expenses) -- How long could you last with no income at all?

They put this in terms of months (and don't give an exact guideline), but at my current level of assets, debt (none), and spending (low), it works out to about 19 years.

Net Worth Ratio (Net Worth / (yearly income * age / 10)) -- You want this ratio to be 1 or higher.

I'm just a bit over 2 at this point, but this ratio seems a bit unfair since it lists your most recent income (which, for most people, is your highest annual income ever) and assumes you've been saving a portion of this level of income since you started working (which is impossible since you've only made this amount for one year.) The older you are (and thus the higher level of income you have), the more this impacts you.

I'm thinking something like this would be better:

Net Worth / (gross income earned since working / year you've been working)

So if you have a net worth of $150,000 and have made $1,000,000 in your career (20 years at $50k average per year), you've been able to convert 15% of your total earnings to net worth. Seems to me that anything above 10% would be "good", but I'll let you all comment on whether or not I'm even in the ballpark.

In the end, the number that really counts is simply "net worth" -- how much you own after all your debts are paid.

Retirement Fund Ratio (Retirement Savings / Yearly Income) -- The goal is to retire with at least 12 times your annual income.

I dislike retirement planning sites/ratios/calculators, etc. that use yearly INCOME as some sort of benchmark. I think yearly EXPENSES is much more accurate. Look at this example:

Retirement savings: $500,000
Yearly income: $100,000
Yearly expenses: $50,000

This person lives well below his income and thus has 10 years of living expenses saved for retirement. This seems like a meaningful number to me. The fact that he has five years of his income saved up seems much less important.

I have 10 times annual income saved and 22 years of annual expenses. See what I mean?

How about you? Where do you stand on these ratios? Are you happy with your progress or not?